| Market Index | 12/30/ 2011 | 7/20/ 2012 | Week Change | Simple YTD % |
| Dow Industrials Avg | 12,217.56 | 12,822.57 | 0.35% | 4.95% |
| S&P 500 | 1,257.60 | 1,362.66 | 0.43% | 8.35% |
| Fed Funds Rate | 0.04% | 0.14% | -0.04% | 250.00% |
| 10 yr T-note Yld | 1.88% | 1.44% | -0.05% | -23.40% |
| 5 yr T-note Yld | 0.83% | 0.56% | -0.06% | -32.53% |
| 5 yr TIPS - 'Real' Yld | -0.89% | -1.25% | -0.06% | -40.45% |
| Implied 5 yr Inflation % | 1.72% | 1.81% | 0.00% | 5.23% |
| 2 yr T-note Yld | 0.24% | 0.20% | -0.04% | -16.67% |
| 2-10 Yr Slope | 1.64% | 1.24% | -0.01% | -24.39% |
| 90 day T-bill Yld | 0.01% | 0.08% | 0.00% | 700.00% |
| Gold ($/oz) | $1,566.80 | $1,582.80 | -$2.60 | 1.02% |
| WTI Oil ($/brl) | $98.83 | $91.93 | $5.27 | -6.98% |
| VIX "Worry Index" | 23.4 | 16.27 | -0.47 | -30.47% |
| Credit Spreads | 12/30/ 2011 | 7/20/ 2012 | Week Change | Simple YTD % |
| Inv Grade Credit Idx | 4.63% | 3.45% | -0.08% | -25.49% |
| Mid Grade Credit Idx | 8.86% | 7.31% | -0.08% | -17.49% |
| Markit CDX Inv Grd Idx | 120 | 108 | -4.42% | -10.00% |
| Markit CDX Mid Grd Idx | 247 | 206 | -4.63% | -16.60% |
| Mid Grade to 10 yr T-Note Spread | 698 | 587 | -0.51% | -15.90% |
Monday, July 23, 2012
Market Data: Week Ending July 20, 2012
Monday, July 16, 2012
Is the Stock Market Trailblazing Tax receipts?
Tom McClellan writes last week about a predicament the US fiscal policy has created. There are no answers offered but there is a heads up for investors. Tax receipts may fall soon and stay there for two years after the Presidential elections. Here is what he writes and a link to his blogpost.
The U.S. is racing up toward the "fiscal cliff", a horrible deal agreed to by both houses of Congress that is so terribly unthinkable that the two sides which agreed to it figured no one would ever let the situation proceed to that outcome. Now both sides are playing "chicken", as the deadline zooms toward us. Those who are advocating austerity of federal spending don’t have a genuine understanding of the severity of cuts that would be needed to balance the budget. And those who think that the problem can be solved through higher tax collections are similarly clueless about just how much money can be reasonably brought in.
The chart above helps us to see this point more clearly. The price plot of the SP500 is shifted forward by 12 months to reveal how total federal tax receipts tend to rise and fall as an echo of what the stock market does. The drop in stock prices during the summer of 2011 says that tax receipts should see a similar stumble (on a 12-month basis), and the tepid rebound says that tax receipts on an annual basis are not going to get much higher than what we have been seeing. And if the stock market follows its typical path for the first two years of a new presidential term (2013-2014), then we cannot expect to see the stock market bend the tax collections curve much higher for the next couple of years.
The whole reason why this is so important has to do with the vast spread between receipts and expenditures, as shown in the chart below. Each is expressed as a percentage of GDP, to help us better see the magnitude of both of them.
The U.S. is racing up toward the "fiscal cliff", a horrible deal agreed to by both houses of Congress that is so terribly unthinkable that the two sides which agreed to it figured no one would ever let the situation proceed to that outcome. Now both sides are playing "chicken", as the deadline zooms toward us. Those who are advocating austerity of federal spending don’t have a genuine understanding of the severity of cuts that would be needed to balance the budget. And those who think that the problem can be solved through higher tax collections are similarly clueless about just how much money can be reasonably brought in.
The chart above helps us to see this point more clearly. The price plot of the SP500 is shifted forward by 12 months to reveal how total federal tax receipts tend to rise and fall as an echo of what the stock market does. The drop in stock prices during the summer of 2011 says that tax receipts should see a similar stumble (on a 12-month basis), and the tepid rebound says that tax receipts on an annual basis are not going to get much higher than what we have been seeing. And if the stock market follows its typical path for the first two years of a new presidential term (2013-2014), then we cannot expect to see the stock market bend the tax collections curve much higher for the next couple of years.
The whole reason why this is so important has to do with the vast spread between receipts and expenditures, as shown in the chart below. Each is expressed as a percentage of GDP, to help us better see the magnitude of both of them.
Market Data: Week Ending July 13, 2012
| Market Index | 12/30/ 2011 | 7/13/ 2012 | Week Change | Simple YTD % |
| Dow Industrials Avg | 12,217.56 | 12,777.09 | 0.04% | 4.58% |
| S&P 500 | 1,257.60 | 1,356.78 | 0.15% | 7.89% |
| Fed Funds Rate | 0.04% | 0.18% | 0.00% | 350.00% |
| 10 yr T-note Yld | 1.88% | 1.49% | -0.06% | -20.74% |
| 5 yr T-note Yld | 0.83% | 0.62% | -0.02% | -25.30% |
| 5 yr TIPS - 'Real' Yld | -0.89% | -1.19% | -0.04% | -33.71% |
| Implied 5 yr Inflation % | 1.72% | 1.81% | 0.02% | 5.23% |
| 2 yr T-note Yld | 0.24% | 0.24% | -0.03% | 0.00% |
| 2-10 Yr Slope | 1.64% | 1.25% | -0.03% | -23.78% |
| 90 day T-bill Yld | 0.01% | 0.08% | 0.01% | 700.00% |
| Gold ($/oz) | $1,566.80 | $1,585.40 | $6.50 | 1.19% |
| WTI Oil ($/brl) | $98.83 | $86.66 | $2.21 | -12.31% |
| VIX "Worry Index" | 23.4 | 16.74 | -0.36 | -28.46% |
| Credit Spreads | 12/30/ 2011 | 7/13/ 2012 | Week Change | Simple YTD % |
| Inv Grade Credit Idx | 4.63% | 3.53% | -0.10% | -23.76% |
| Mid Grade Credit Idx | 8.86% | 7.39% | 0.05% | -16.59% |
| Markit CDX Inv Grd Idx | 120 | 113 | 3.67% | -5.83% |
| Markit CDX Mid Grd Idx | 247 | 216 | 3.35% | -12.55% |
| Mid Grade to 10 yr T-Note Spread | 698 | 590 | 1.90% | -15.47% |
Friday, July 13, 2012
"Trying to Stay Focused on the Big Picture"
In his weekly blog post on July 6, 2012, Doug Noland has described the real risk of a credit bubble and compared it with the real risk of asset inflation. In his description, asset inflation is the initial reaction to monetary and fiscal avoidance of austerity. The cost is a heightened and delayed reaction to excess credit and money supply which will create a maladjusted economy characterized by a lack of solvency among the many and wealth held by only a few. Here is a link to the entire post and here is a major section of his post for future reference.
"Policymakers will, as we’ve witnessed again recently from European politicians and central bankers, respond to heightened systemic stress by ratcheting up their responses. Yet, and also no surprise, these increasingly desperate measures will have depleted and fleeting effects – and really tend only to heighten market instability. The big unknown remains the timing of when market confidence in the capacity of policy measures to incite market rallies is finally depleted. Without this carrot, I expect we’ll be facing an altered global market environment.
The structure of today’s marketplace (especially with respect to the proliferation of hedging and derivative trading strategies) is conducive to short squeezes. This is compounded by the policy environment backdrop whereby market players (sophisticated and otherwise) fully recognize that policymakers are determined to backstop the markets. This incentivizes speculation and, I would argue, has nurtured Bubble Dynamics. Understandably, trumpeting global market resilience in the face of European debt tumult and slowing global growth has become common. I continue to fear that the confluence of complacency, policy impotence, and endemic global market speculative excess creates unappreciated systemic fragilities.
Extraordinarily divergent macro views have solidified. Some see the makings for a new secular bull market. I instead see an increasingly susceptible global Credit Bubble and attendant historic financial mania. A critical facet of this thesis remains that policymakers will go to incredible lengths to sustain Credit, financial and economic booms. And while this guarantees difficulty in assessing the timing of when catastrophe might strike – it seemingly ensures such an outcome. With unsettled markets only adding to confusion, I thought it appropriate this week to touch upon Credit theory to try to bring a little clarity to the muddled macro backdrop – Trying to Stay Focused on the Big Picture.
"Policymakers will, as we’ve witnessed again recently from European politicians and central bankers, respond to heightened systemic stress by ratcheting up their responses. Yet, and also no surprise, these increasingly desperate measures will have depleted and fleeting effects – and really tend only to heighten market instability. The big unknown remains the timing of when market confidence in the capacity of policy measures to incite market rallies is finally depleted. Without this carrot, I expect we’ll be facing an altered global market environment.
The structure of today’s marketplace (especially with respect to the proliferation of hedging and derivative trading strategies) is conducive to short squeezes. This is compounded by the policy environment backdrop whereby market players (sophisticated and otherwise) fully recognize that policymakers are determined to backstop the markets. This incentivizes speculation and, I would argue, has nurtured Bubble Dynamics. Understandably, trumpeting global market resilience in the face of European debt tumult and slowing global growth has become common. I continue to fear that the confluence of complacency, policy impotence, and endemic global market speculative excess creates unappreciated systemic fragilities.
Extraordinarily divergent macro views have solidified. Some see the makings for a new secular bull market. I instead see an increasingly susceptible global Credit Bubble and attendant historic financial mania. A critical facet of this thesis remains that policymakers will go to incredible lengths to sustain Credit, financial and economic booms. And while this guarantees difficulty in assessing the timing of when catastrophe might strike – it seemingly ensures such an outcome. With unsettled markets only adding to confusion, I thought it appropriate this week to touch upon Credit theory to try to bring a little clarity to the muddled macro backdrop – Trying to Stay Focused on the Big Picture.
Monday, July 9, 2012
Market Data: Week Ending July 6, 2012
| Market Index | 12/30/ 2011 | 7/6/2012 | Week Change | Simple YTD % |
| Dow Industrials Avg | 12,217.56 | 12,772.47 | -0.84% | 4.54% |
| S&P 500 | 1,257.60 | 1,354.68 | -0.55% | 7.72% |
| Fed Funds Rate | 0.04% | 0.18% | 0.08% | 350.00% |
| 10 yr T-note Yld | 1.88% | 1.55% | -0.09% | -17.55% |
| 5 yr T-note Yld | 0.83% | 0.64% | -0.08% | -22.89% |
| 5 yr TIPS - 'Real' Yld | -0.89% | -1.15% | -0.11% | -29.21% |
| Implied 5 yr Inflation % | 1.72% | 1.79% | 0.03% | 4.07% |
| 2 yr T-note Yld | 0.24% | 0.27% | -0.03% | 12.50% |
| 2-10 Yr Slope | 1.64% | 1.28% | -0.06% | -21.95% |
| 90 day T-bill Yld | 0.01% | 0.07% | -0.01% | 600.00% |
| Gold ($/oz) | $1,566.80 | $1,578.90 | -$25.30 | 0.77% |
| WTI Oil ($/brl) | $98.83 | $84.45 | -$0.51 | -14.55% |
| VIX "Worry Index" | 23.4 | 17.1 | 0.02 | -26.92% |
| Credit Spreads | 12/30/ 2011 | 7/6/2012 | Week Change | Simple YTD % |
| Inv Grade Credit Idx | 4.63% | 3.63% | -0.13% | -21.60% |
| Mid Grade Credit Idx | 8.86% | 7.34% | -0.20% | -17.16% |
| Markit CDX Inv Grd Idx | 120 | 109 | -7.63% | -9.17% |
| Markit CDX Mid Grd Idx | 247 | 209 | -5.86% | -15.38% |
| Mid Grade to 10 yr T-Note Spread | 698 | 579 | -1.86% | -17.05% |
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